So the saying goes that when the US economy sneezes the world catches a cold. The big question is, was that useful throat clearing cough or the start of a winter bug?
US Stock Markets were down heavily across Tuesday trading, with indices in the red to the tune of -3-4%. So, with markets beginning the week so strongly after the positive takeaways from the G20 meeting between the US and China, what has caused this strong move downwards? And, given that the US stock markets have been a cornerstone of growth in 2018, should investors now begin to feel more sceptical of this supposed strength?
How did it happen?
Interestingly, the US Stock Market move began last week when Chairman of the Federal Reserve, Jerome Powell used two simple words “just below” in his announcement. Powell said in his statement that US interest rates were “just below” the range of estimates that are about right for the US economy. Immediately after the statement the market took it at face value, that maybe US interest rates weren’t due to climb as high as expected. Which is usually seen as excellent news.
Good news which took a turn
Lower US interest rates are great for US consumers as they can spend more. US companies can also benefit from borrowing more to grow their business. All in all, the markets were up and everything looked rosy. More good news for the US Stock Market came over the weekend, as the positive news of the US and China trade talks gave them a further boost. Markets were up strongly on Monday, with most enjoying a circa 2% swing into the green. So what changed on Tuesday?
Market noise or a cause for concern?
On Tuesday, investors started to question exactly why interest rates weren’t going to rise as fast as expected. Many came to the conclusion that this was due to the economy not being strong enough to warrant increased rates. Peak economic growth usually leads to a slowdown in the economy, opening the question of whether the US economy is starting to slow down following China. By Tuesday midday, Investor reactions began to show in the US Stock Market, as dips began to emerge.
What has the effect been so far?
On the back of this ‘growth shock’ we have seen some hefty moves across US growth stocks on Tuesday. Amazon, Apple and Netflix are fell by 6%, 4.5% and 5% respectively, as their performance is closely linked to growth. Caterpillar, who is seen as an indicator for US heavy industry was also down 7%. Banks, who typically profit from higher interest rates on the cash they are required to hold also took a hit with JP Morgan down 4.5%, and Goldman Sachs off 4%.
UK and European markets joined the bandwagon this morning, with most opening in the red to the tune of -1.3%. We will have to wait and see if this dip becomes a more prolonged selloff.
What to look out for
A slowing down of the US Stock Market wouldn’t be surprising as this economic cycle has been extraordinarily long and we are probably overdue a correction. It’s also worth keeping a steely eye on the US Housing market, which could see an upcoming slowdown. That being said, this could all blow over in the same way it began … with a follow up statement from the Fed stating that rates are ‘materially below’ most expectations.
They say that three little words are the most powerful in the world …but for investment managers like myself, these two were quite impactful.